The Hindu Business Line : Sharp fall in corporate bond spreads

Bangalore, Dec. 23 The Reserve Bank of India’s monetary policy initiatives have begun taking effect in the financial markets as corporate bond spreads have dropped sharply over the last two weeks.

The spread between sovereign government securities and Triple ‘A’ rated securities is now down to about 270 basis points. SBI’s 15-year bond Tier-II capital issue for Rs 2,000 crore was priced last weekend at 8.90 per cent. The comparable sovereign security, the 6.17 per cent 2023, was quoted at 6.20 per cent. In October this year, the yield spread between sovereign and Triple A corporate bond was about 500 basis points. For the private sector, the spread was 600 basis points more, though now it is about 400 basis points. The lower spread for public sector Triple ‘A’ as compared with an identically rated private sector is in view of the implicit sovereign guarantee cover.

Bankers said the falling spread implied that lower rates were in view of the increased liquidity availability to the banking sector for corporate credit needs. Non-food credit, as a result, is currently growing at close to 27 per cent on a year-on-year basis. The bankers said the shift to corporate credit was partly in view of falling yields on government securities. With banks chasing government securities, the ten-year yield to maturities have dropped to a low of 5.5 per cent. In fact, some of the banks had, as a result, preferred longer dated securities, particularly those above 15 and 20 years, anticipating a further drop in yields in the coming weeks.

Working funds

Bankers said the falling yields had now resulted in bringing the average yields to well below the weighted average cost of working funds. Cost of working funds currently is around 7.5 per cent. This is in view of the high interest offered on retail deposits for one year and structured deposit rates. Some banks currently continue to offer up to 10 per cent on structured rate for tenures up to 2 years. Retail investors, who had liquidated their holdings in the equity markets, had moved enmasse to these deposit products of public sector banks. As a result, time deposit accretions to the banking sector were taking place at the rate of about Rs 3,500-4,000 crore per day.

Bankers said that bulk of the inflows is mostly into the one-two year deposit slabs. In addition, bankers said that inflows are also taking place from the non-resident investors, mostly into the non-repatriable rupee deposits as rates globally have sharply dived. One-year dollar certificates of deposit (CD) currently offer barely 2 per cent.

Bankers said that faced with this kind of large inflows banks’ interest on bulk deposits has considerably diminished. One year bulk deposit rates are currently far lower than retail rates. One year CD rates are down to 8.1 per cent.

Comparable retail deposit rates for a year are about 50 basis points higher currently, implying low interest for high cost bulk funds.